Whether you buy new or used, there’s no getting around it — buying a car isn’t cheap. So, what can you do if you want to buy a car, but your credit isn’t in great shape, and you’re getting rejected for auto loans from financial institutions? There may be another option.
Buy Here, Pay Here Financing
Buy here, pay here financing is a type of auto financing provided by car dealerships that typically sell previously owned vehicles. These dealerships work with subprime borrowers who have no or poor credit to offer in-house auto financing.
Typically, when you purchase a vehicle, you work with a third-party financial institution for an auto loan. Under a buy here, pay here scheme, the dealer sells you the car and also provides financing. You might see “buy here, pay here” or “we finance” signs outside dealerships that offer this option.
Pros and Cons of Buy Here, Pay Here Schemes
If you’re considering working with a buy here, pay here dealer for financing, it’s important to be aware of the pros and cons and know what to consider before signing on the dotted loan.
One of the pros is that buy here, pay here financing is available for auto loan buyers who may not be served by traditional financing avenues from financial institutions. However, this also means that this financing can come at a high cost, as they tend to have very high interest rates.
According to an article in the Los Angeles Times, many buy here, pay here dealers make this part of their business plan. They make money off sky-high interest rates for subprime borrowers who may end up defaulting on the loan. They then repossess the car and sell it again — potentially at up to eight times the price.
In fact, the average buy here, pay here loan comes with an interest rate of a whopping 20%. For context, the average interest rate on a car loan is around 4%. So when you choose to work with a buy here, pay here dealership, you could be hit with interest rates that are five times higher than the average car loan.
On top of this, buy here, pay here financing might also require a larger down payment. So if you have zero cash saved up, it could still be difficult to secure financing.
As the name suggests, however, buy here, pay here schemes can be convenient. You keep everything in one place and can deal with everything on-site — instead of visiting many different lenders, you can work with one entity for both the buying and financing processes.
It is important to remember, though, that buy here, pay here dealerships require payments in cash. So you may be making many visits to the car dealership, which can actually make it inconvenient.
One other good thing about buy here, pay here schemes is that you might not need a credit check to secure the financing. But that can also not work in your favor, because, if you pay back the loan on time, the dealer may not report your payment history to credit bureaus — which could actually boost your credit score.
Other Ways to Get Auto Financing
If you don’t have great credit, you may think going to a buy here, pay here dealer for financing is your only option. While something to consider, given the downsides, you may want to look into alternatives with a credit union or financial institution.
To improve your credit, make all of your payments on time and keep balances low on your credit cards, while also paying them off in full if you can. Also, hold off on applying for new credit until your credit score improves.
Something else to consider is getting a co-signer. A co-signer is typically a family member with good credit who can help you get approved for a loan. They use their credit to help you secure the loan. However, they are responsible for the loan as well if you end up missing your payments.
Should You Use Buy Here, Pay Here Financing?
If you need to get car financing ASAP, going to a buy here, pay here dealer may work in your favor. However, it’s important to understand the risks and costs of doing so. If possible, look for alternatives that are more cost-effective while also working to improve your credit.
Melanie Lockert is the founder of the blog and author of the book, Dear Debt. Her work has appeared on Business Insider, Time, Huffington Post and more.
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